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Mexico Lifts Rates Amid Peso's Fall, Trump's Rise -- Update

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November 17, 2016

By Robbie Whelan and Santiago Perez

MEXICO CITY -- Mexico's central bank raised interest rates on Thursday as the country grapples with a weaker peso and uncertainty over the future of Mexico's relationship with its largest trading partner.

U.S. President-elect Donald Trump's pledge to revise the North American Free Trade Agreement has caused deep anxiety among Mexican leaders and businesses. Mexico sends 80% of its exports to the U.S. market.

Some firms are already selling assets, cutting capital expenditures and hedging currency risks as the Mexican peso hit new lows, falling as much as 13% against the U.S. dollar in the days after the election.

For the Bank of Mexico, which raised its overnight ratehalf a percentage point to 5.25% on Thursday, a weaker peso poses an inflation risk by pushing up prices of imports. Inflation currently sits just above the bank's 3% target, despite three rate increases this year, including in September when Mr. Trump gained in pre-election polls.

"It's still difficult to asses the specifics that will define the economic policies of the U.S. regarding the bilateral relation with Mexico from 2017, but the implicit risks have had an important impact on the local financial markets," the bank said.

Institutional investors have started to contact Mexican firms to ask about their exposure to currency volatility and how are they managing imports and debt in foreign currency. Such debt gets more expensive with a weaker peso.

"Beyond the impact on a strategic level, they first want to assess the financial impact from a weaker peso," said Carlos Madrazo, head of investor relations at Grupo Televisa SAB,Mexico's leading television broadcaster.

For the first time in years, the Grupo Televisa is reducing capital expenditures linked to dollar-denominated purchases of equipment such as converter boxes or coaxial cable, according to the company.

Broader investment has already been hit. Foreign direct investment was $14.4 billion in the first half of this year, of which the U.S. accounted for 35%. It is on pace to fall 30% when compared with the annual average of $40 billion between 2013 and 2015.

Merger and acquisition activity and investment decisions are being postponed until Mr. Trump's plans become clearer, some investment bankers said. New listings on the Mexican stock exchange are likely to dry up, at least for a while.

"We will probably see some delays in the listings we had, but I would say delays not cancellations. Sooner or later they will need financing," said José Oriol Bosch, chief executive of the Mexican stockexchange.

For many in Mexico, the idea that free trade with the U.S., the destination for 80% of Mexican exports, might be at risk has come as a shock. That is because Mexico has placed its bets on free trade as the path to development, with 44 such deals, the most of any nation.

"Mexico has no Plan B for the potential shock from a U.S. withdrawal from Nafta," Luis Arcentales, chief economist for Latin America from Morgan Stanley, wrote in a note to clients on Wednesday.

After Mr. Trump's win, several investment banks and debt ratings firms lowered their Mexico growth estimates for 2017 to a range of 1.7% to 1.9%, from about 2.5%. The Finance Ministry has maintained its estimate of 2% to 3% growth next year.

The damage isn't likely to be limited to exporters. Marcelo Melchior, executive president of Grupo Nestlé México, said he was worried that if U.S. policies curbed remittances sent to Mexico, it could force his core working-class customers to cut back on day-to-day expenses.

"What hurts the most...is not having the certainty about the future," he said.

Foreign companies investing in Mexico are also reviewing their business plans. Alexander Wehr, president and chief executive of BMW Group in Mexico, is one of a handful of auto executives in this country forced to rethink strategies.

The German auto maker in June broke ground on a $1 billion factory in central Mexico, with plans to eventually sell 150,000 3-Series sedans a year, 70% of them in the U.S.

Mr. Trump has threatened to slap tariffs on auto makers that export vehicles from Mexico for sale in the U.S., or tear up Nafta altogether.

Mr. Wehr said BMW's commitment to Mexico was stable, but added the company is discussing fine-tuning the business plan depending on what direction the new administration takes. He said that top on the list of ideas for adjustments was to stay inMexico and export cars to other regions, including Europe, Asia and Latin America.

The most significant short-term impact for Mexican firms comes from a weaker peso. One real-estate development company has slashed the price of apartments it is selling and trying to sell an unfinished apartment tower to another construction company as a way of maximizing its cash.

Some companies said they don't intend to put off their investment plans. Arca Continental SAB, a big Coca-Cola bottler, said it would press ahead with plans to buy bottling operations in Texas, New Mexico, Oklahoma and Arkansas, a move that would consolidate its position as the strongest bottler in the border region.

"Over our 90-year history as bottler for Coca-Cola, we have confronted more than 15 crises. Latin America is like that, and during periods of crisis, we continue with investments," said Ulises Fernández, treasury chief and head of investor relations.Wal-Mart de Mexico, the country's largest retailer, also said it also will stick with plans to double sales in Mexico over a 10-year period. The company said it has no debt and cash of $925 million. "Our plan isn't affected by the short-term," said Antonio Ocarranza, a spokesman.

--José de Córdoba and Anthony Harrup contributed to this article.

Write to Robbie Whelan at robbie.whelan@wsj.com and Santiago Perez at santiago.perez@wsj.com